Another Gamble for JetBlue
Ted Reed
05/03/06 - 07:17 AM EDT
Once again,
JetBlue Airways (JBLU Quote) is going against the grain in the airline industry.
It was JetBlue that made Kennedy International Airport work, when nobody thought it would. JetBlue said amenities belong in coach class, not just in first class. Now, JetBlue is focused on operating two aircraft types, when most other medium-sized carriers are scrambling to operate just one.
Previously committed to growing with a fleet of Airbus 320s seating 156 passengers, JetBlue now says it will sell two to five of its 89 A320s and defer deliveries of 12 more. Because high fuel prices have a big impact on its long-haul routes, the carrier wants to reduce flights from its hub at New York's Kennedy to Florida and the West Coast.
Instead, it will focus on expanding short-haul routes, such as New York to Charlotte, N.C., with Embraer 190s seating 100 passengers. JetBlue currently operates 13 E190s. The carrier will add 18 this year and 18 more in 2007.
By contrast,
Alaska Air Group (ALK Quote) unit Alaska Air, which has 113 aircraft, is investing $750 million to replace its 26 MD-80s and fly only Boeing 737s.
Frontier Airlines (FRNT Quote) operates a fleet of 49 Airbus jets, after converting from an all-Boeing fleet.
Spirit Airlines will have 31 Airbus jets at the end of the year, after getting rid of its MD-80s. The principal exception, so far, has been
AirTran Holdings (AAI Quote) unit AirTran Airways, which operates two fleet types.
Shaking Confidence
Low-fare leader
Southwest Airlines (LUV Quote) essentially designed the model for post-legacy airlines. Southwest remains committed to operating a single aircraft type, the Boeing 737, and it has 451 of them. Last year, the company considered adding regional jets to its fleet, but decided against it.
"Simplicity is the key," says Southwest spokesman Ed Stewart. "It is a marvelous thing to have crews that can fly on any airplane at any time, and to have a maintenance department work on a single aircraft type."
AirTran has been successful with two very different aircraft, the Boeing 737 seating 137 passengers and the Boeing 717, which seats 117. "The challenge to JetBlue will be to manage two fleet types," said AirTran President Bob Fornaro, in an interview. "I know we can do it, but I don't know whether they can."
JetBlue not only wants to operate two fleet types, it has changed strategies twice to get to that point. Initially, it was committed to flying the A320 between New York and about 40 markets, many of them in the East. Then it shifted, pouring resources into the transcontinental and Florida markets. Now, it's returning to the first set of markets, but with a new type of aircraft.
The reshuffling has contributed to a loss of confidence in JetBlue, which last week reported its second money-losing quarter. Shares of JetBlue have fallen to $9.69 after ending 2005 at $15.38, a 37% decline. The company's credit was recently downgraded by Standard & Poor's. Analyst Jamie Baker of JPMorgan says the airline's flaws include "over-aggressive growth, unrelenting competition, multiple fleet-types, shareholder value destruction and now suspect revenue optimism."
JetBlue introduced its first E190 in November and immediately ran into problems caused by overscheduling, late deliveries, delays in equipping the planes to fly and a crew adjustment period. On a conference call last week, CEO David Neeleman said the problems are over. "We were having challenges on the operating side, but that situation is behind us now," Neeleman said.
Spokesman Bryan Baldwin says the E190 allows JetBlue to add service to small-to-medium-sized markets that are "underserved and overpriced" and to offer more flexibility. In some markets, JetBlue can use A320s or E190s, depending on seasonal demand. In others, such as Boston-West Palm Beach, the E190s are so successful that the company may transition to A320s.
Experts say the long-term outlook for the onetime industry darling is unclear.
Two Models
Aviation consultant Scott Hamilton, who publishes an online industry newsletter, says JetBlue had to go into smaller cities, and chose one of two options -- the AirTran model with two sizes of airplanes or the Southwest approach, featuring a single airplane type.
The latter option does have a drawback, Hamilton says, in that it requires Southwest to sometimes operate its jets with lower-than-optimal load factors.
"What do you do in markets where the equipment is too big?" he asks. "Accept lower load factors and less frequency, or go to a smaller airplane type and complicate training, provisioning, spare parts and all the rest of it? JetBlue concluded that one size does not fit all. It will take a couple of years before we know if they made the right decision."
Aviation consultant Robert Mann says the E190 is more fuel efficient and more comfortable than any predecessor regional jet, and opens many new markets. "You go lower in the pyramid and there are vastly more markets to be served," Mann says. "In that sense, it is an opportunity, and an opportunity off the beaten track of the other low-cost carriers, who generally fly larger equipment."
The downside for JetBlue, Mann says, are high upfront costs for tasks such as training staff, from pilots to station agents, opening new stations and hiring new agents, providing spare aircraft, even at first, when only a few routes are operating, and spending time on route planning.
"Unfortunately, at JetBlue, the introduction was botched," Mann says. But he says he's generally optimistic about the carrier's future because of its strong position in the New York market and its potential in Boston and West Coast markets.
"I don't think they've done anything yet that is equivalent to shooting themselves in the head," he says. "So far, they have only shot themselves in the foot, and those things heal."
